Why Piper Sandler Likes E-Commerce Stocks RealReal, Revolve Group

Research firm Piper Sandler initiated coverage of two fashion plays Tuesday: RealReal Inc REAL and Revolve Group Inc RVLV.

The Analyst: Erinn Murphy initiated coverage of RealReal with an Overweight rating and $19 price target.

The analyst also initiated coverage of Revolve Group with an Overweight rating and $30 price target.

The RealReal Thesis: RealReal is the leading resale marketplace online platform for used luxury goods that require an authentication process, Murphy said in the initiation note.

Data from 2019 shows that 83% of gross merchandise volume came from repeat buyers who are very active on the platform and constantly hunting for new products, the analyst said. 

The company has suffered a setback, as GMV pre-COVID-19 was growing over 40%, she said. 

The pandemic translated to limited supply on the platform, as half of all supply comes from in-home appointments, Murphy said.

The company adapted to add virtual appointments and safer and smaller store formats, the analyst said. 

These initiatives are likely to help the business "stem losses," and positive EBITDA isn't expected until 2023, she said.

Nevertheless, investors should be buyers of the stock now, as the company fits in with "sticky" themes going forward, especially growing demand to buy and sell luxury goods, Murphy said. 

The luxury market is estimated to become $352 billion by 2025, and 28% of Gen Z members surveyed by the research firm already use a secondhand online marketplace, the analyst said. 

"While the profitability story has been pushed out— at least until 2022 (we have adjusted EBITDA as positive in 2023), we see limited risk to shares at this level and could see a pathway for positive news flow in 2021."

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The Revolve Group Thesis: Revolve is an online retailer that sells its own branded products and other third-party brands.

The company is considered a "solid reopening beneficiary" when a vaccine is widely distributed, Murphy said.

Expectations for a return of social gatherings, concerts and events represent a clear tailwind later in 2021, the analyst said. 

Unlike RealReal, Revolve is a profitable company today, with an EBIT margin of around 9%, she said.

The company has plenty of growth potential, as it controls a "minute share" of around 0.1% of a large market that is estimated at $622 billion in 2021, according to Piper Sandler. 

REAL, RVLV Price Action: Shares of RealReal were trading higher by 11.29% at $17.06 at last check Tuesday. Shares of Revolve were up 9.82% at $26.74.